NEWS Report No. MM 95-117 MASS MEDIA ACTION December 12, 1995 FCC CONDITIONALLY GRANTS THE APPLICATIONS FOR ACQUISITION OF TELEVISION STATIONS BY QWEST BROADCASTING L.L.C. The FCC has conditionally granted the applications for transfer of control of WNOL-TV, New Orleans, from Quincy D. Jones to Qwest Broadcasting L.L.C. (Qwest) and the assignment of license of WATL(TV), Atlanta, Georgia, from Fox Television Stations Inc. (Fox) to Qwest. The applications presented questions of (1) interpretation of the Commission's interim attribution policy with respect to limited liability companies (LLCs) proposed in its pending attribution rule making and designed to facilitate minority ownership of broadcast stations, (2) application of the Commission's cross-interest policy in the New Orleans and Atlanta markets, and (3) whether the tax certificates requested by the current owners of the licensees of WNOL-TV and WATL(TV) could be issued under the specific exceptions established earlier this year by Congress when it repealed the minority tax certificate program. As to the first issue, the Commission formulated a standard for the interim LLC exception for minority entities and found that Qwest met that standard. In so doing, it found that Qwest is legally and actually controlled by five African-American or Hispanic owners with extensive broadcasting, television programming and business and management experience who are contributing equity in excess of the minimum investment benchmark. The Commission found nonattributable Qwest's nonvoting investor, Tribune Broadcasting Company (Tribune), but conditioned a final determination on this matter upon resolution of its pending rule making on attribution. As to the second issue, the Commission found that while its cross-interest policy was implicated in New Orleans and Atlanta, it also conditioned an ultimate finding on this issue on resolution of the attribution rule making. Finally, as to the third issue, the Commission found that the requests for tax certificates were filed prior to the date specified in the statute and that the contracts of sale, also executed prior to that date, specifically were not contingent upon the issuance of a tax certificate, a requisite provision under the statute. The Commission found, accordingly, that the transactions met the criteria Congress established to allow certain prior negotiated tax certificate transactions to go forward after repeal of the Commission's tax certificate authority. Qwest is a newly formed LLC whose two members are QwestCom L.P. (QwestCom), which will hold all of Qwest's voting shares, and Tribune, which will hold nonvoting shares. QwestCom is composed of one limited partner and four general partners, all of whose five principals are African-American or Hispanic. Those principals are: Jones, Sonia Gonsalves Salzman, Geraldo Rivera, Willie Davis, and Donald Cornelius. Tribune, the other member of Qwest, is a wholly owned subsidiary of the Tribune Company, a publicly held corporation, and is the licensee of several television stations, including one in New Orleans, WGNO(TV), and one in Atlanta, WGNX(TV), and of several radio stations. Qwest sought nonattribution of the interests of Tribune under the interim exception for minority-controlled LLCs established by the Commission in its pending rule making on attribution (MM Docket No. 94-150). An attributable interest in the Qwest stations would place Tribune in violation of the Commission's duopoly rule in both New Orleans and Atlanta, because it owns and controls a television station in each market. In the attribution rule making, the Commission tentatively proposed to treat LLCs as limited partnerships, thereby rendering a member's LLC interest cognizable unless the applicant certifies that that member is not materially involved in the management or operation of the media-related activities. Tribune had not so certified. However, the Commission proposed, on a case-by-case basis, as an interim exception to this proposal to not attribute certain uninsulated LLC interests where doing so would advance minority ownership of broadcast stations. The Commission set forth a two-pronged test for application of this interim minority exception to its LLC proposal. First, the controlling member or members of the LLC must be minority individuals or minority-controlled entities which, collectively, hold more than 20 percent of the equity of the LLC. A significant factor in assessing the locus of control in the context of the minority exception to the interim LLC policy, the Commission stated, is the broadcast and related experience of the participating minorities. Second, the influence of the LLC members seeking nonattributable status, even though not fully insulated, must be sufficiently attenuated such that the Commission's interest in facilitating minority ownership outweighs its concern with such influence. In applying the two-pronged test to Qwest, the Commission first found that QwestCom, composed of five African-American or Hispanic owners, holds all of the voting interests of Qwest and, therefore will possess all legal and actual control of the LLC. Significant to that determination, the Commission stated, was the extensive broadcasting, television programming and other business and management experience of the minority owners. Moreover, the Commission found that the minorities were contributing well in excess of the 20-percent equity benchmark. As to the second prong, the Commission acknowledged that although Qwest is organized as an LLC, which vests control of the entity in all members, Qwest attempted, through the LLC agreement executed by the parties, to limit the influence of Tribune by structuring its management according to the corporate model. The Commission stated that it did not agree that an LLC, even one structured such as Qwest, is the legal or functional equivalent of a corporation, but it assessed Qwest's efforts to limit Tribune's influence using the attribution standards developed for corporate forms of businesses. The Commission stated that when assessed cumulatively, Tribune's interests and relationships raised questions as to whether the level of influence conveyed by these multiple relationships should be deemed nonattributable. The question of whether and under what circumstances multiple relationships should be considered attributable in the aggregate is an issue raised in the pending rule making on attribution. Rather than deny or defer action on the Qwest applications until resolution of that rule making, the Commission found it would best serve the public interest to allow transfer and assignment of the stations so as to permit Qwest to own and operate them, in recognition of both the increased participation in New Orleans and the new ownership in Atlanta by minority individuals who are experienced broadcasters, television programming producers and business persons. Thus, the Commission deemed Tribune's interests in Qwest to be nonattributable, but it conditioned grant of the applications upon the outcome of the attribution rule making. The Commission also conditioned grant upon there being no substantial and material changes to the Qwest LLC agreement, except as may be approved in advance by the Commission, and the submission of all insubstantial amendments to that agreement to the Mass Media Bureau within 10 days of execution of such amendments. The applications also presented a cross-interest policy issue because Tribune owns and controls television stations in New Orleans and Atlanta, where the Qwest stations are also located. The Commission's cross-interest policy mandates evaluation of the ties between media outlets to insure there is no diminution of diversity or competition where a party holds an attributable interest in or controls one media outlet in a market and holds a nonattributable interest in another media outlet in the same market. The Commission found that while Tribune's interests may implicate the current cross-interest policy, it noted that the policy is also under consideration in the attribution rule making. The Commission cited the minority ownership of the stations, the competitive and diverse nature of the New Orleans and Atlanta markets, and the fact that the Qwest and Tribune stations are all UHFs, but conditioned grant of the applications on the resolution of the cross-interest matter in the pending attribution rule making. Finally, the Commission issued tax certificates to Jones and Warner Communications Inc., the current owners of WNOL-TV, and to Fox, the current owner of WATL(TV), for sale of broadcast facilities to minority-owned and -controlled Qwest. In so doing, the Commission determined that the request for the tax certificates and the contract for the sale of the stations satisfied all of the requirements of the Self-Employed Health Insurance Act, H.R. 831 at 2(d), recently enacted by Congress. Further, the Commission found that issuance of tax certificates for the Qwest transactions were consistent with Commission precedent. Grant of the applications is effective upon adoption. Action by the Commission December 12, 1995, by Memorandum Opinion and Order (FCC 95-497). Chairman Hundt, Commissioners Quello, Barrett and Chong, with Commissioner Ness concurring and issuing a statement. -FCC- News Media contact: Karen Watson or Maureen Peratino at 202/418-0500. Mass Media Bureau contact: Robert Ratcliffe at 202/418-2600. December 12, 1995 CONCURRING STATEMENT OF COMMISSIONER SUSAN N ESS Re: New Orleans, LA, and Atlanta, GA: Transfer/assignment of licenses of WNOL-TV and WATL(TV) I reluctantly concur with the decision to allow Tribune to acquire substantial ownership interests in two television stations, each of which is located in a city where Tribune already owns another station. The availability of news and informational programs from a variety of sources within a community is critical to an informed citizenry. Broadcasting today is the only free, universally available video distribution medium in this country. The number of television stations in each community is limited. Our duopoly rules, which prohibit common ownership of more than one television station in a single market, were designed to ensure the availability of different viewpoints. Under our duopoly rules, Tribune cannot hold an attributable interest in either of the two stations here at issue because it already owns one station each in Atlanta and New Orleans. It instead has formed a limited liability company (LLC) with QwestCom L.P., whose principals are minorities. Under our interim policy governing attribution of interests in LLCs, a member's interest in an LLC is cognizable unless the applicant certifies that the member is appropriately insulated. Here, the parties have chosen not to so insulate Tribune. Instead Qwest relies on a narrow exception to the interim LLC policy to permit greater involvement where it would advance our objective of enhancing opportunities for minority broadcast station ownership. It is abundantly clear that Tribune will have the ability to influence the management of these stations and to impact market competition. Why else would Tribune have contributed a third of the cash equity and guaranteed the bank debt of others for a total of 75% of the equity in the transaction? Why else would it hold subordinated notes constituting 37 percent of the total capitalization of Qwest, which is convertible to equity in five years (if our ownership rules permit)? Why else would it have an indefeasible right to buy the stations from its partners in less than five years, if our ownership rules are changed? Despite my serious reservations over such influence and ownership concentration within local markets, I concur in the outcome. There are five mitigating factors. First and foremost, these grants are subject to the rulemaking on attribution with respect to both the attributable status of Tribune and the applicability of the cross-interest policy to Tribune's interest in Qwest. Second, the acquisitions, taken together, do increase minority ownership in a very major market, Atlanta, Georgia (the tenth largest market in the country), albeit at the cost of lessening the minority stake in the smaller New Orleans market to one of essentially a five-year leasehold interest. Third, the contracts and application were signed and delivered before the Commission initiated its Attribution Review rulemaking. Fourth, the minorities involved with Qwest are experienced broadcasters who understand our rules and the potential consequences if control and management are not exercised as set forth in the documents submitted to this Commission. And, finally, the stations at issue all are UHF stations and are not the dominant facilities in their markets. This case is another in a series which push the limits of our rules, perhaps to attain a marketplace advantage in contemplation of changes to our rules. In this case, the duopoly and cross-interest rules are at issue. We have an obligation to establish clear rules that provide an even playing field for all broadcasters. We do not have that today, but I look forward to finalizing such rules in the near future.